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Cash as a store of value or as a prime mode of saving has shown a secular downward trend in the country during the last 50 years.
But the velocity of currency (ratio of nominal GDP to cash in circulation) has declined, implying faster growth in currency holdings than nominal GDP.
TIME DEPOSITS UP
This is the finding of a research study by R Mohan (till recently with the Indian Revenue Service), N. Ramalingam (Gulati Institute of Finance and Taxation, Thiruvananthapuram) and D Shyjan (John Mathai Centre, Thrissur).
The research was aimed at tracking trends in cash holding, estimating tax leakage and sizing up the extent of tax-evaded income in India.
While the first is based on long-run trends, the second and third are based on the latest three years for clear empirical reasons.
The holding of cash as a store of value is on the decline and time deposits occupy a much better position, the research shows.
BANKING SUBSTITUTES
To get a better picture, the researchers looked at the growth in cash holdings, nominal GDP and the velocity of currency.
The velocity declines in an economic situation in which GDP grows faster, implying that cash held by the public has grown faster than GDP.
This happened during a period when the cash-to-bank deposit ratio headed south, the research shows.
In the 2000s when substitutes such as Internet banking and credit/ debit cards were introduced, the velocity had declined, indicating a boost in cash holdings even as nominal GDP grew faster.
The higher cash holding could not be attributed to a higher tax ratio, either as lower tax rates had more or less stabilised during this phase.
GOVERNMENT SPENDING
A probable reason could be higher government spending to fight the global economic slowdown and evidenced in the rise in revenue deficit-GDP ratio.
As regards tax evasion, the study estimated that during 2012-13, 2013-14 and 2014-15, the actual direct tax collection was at 44, 45, and 43 per cent of the potential.
The size of tax evaded income works out to 40.96 per cent of the official Gross Value Added (GVA).
These estimates hold good if the downward bias of about 25 per cent in estimation of GVA, as found in a study in 2015 by Sacchidananda Mukherjee and Kavita Rao (NIPFP), is factored in.
LACKS COORDINATION
If this downward bias in GVA is excluded, direct tax collected would be 63, 64 and 62 per cent of the potential, and tax evaded economy would be 21 per cent of official GVA, which is still substantial, the researchers said.
Such large direct tax leakage calls for serious thinking, especially in the context of technology-based tools having entered the direct tax administration in a big way.
Leakage in direct tax mop-up could have led to a shrinking of the divisible pool of taxes for states.
A major cause of tax leak is the poorly coordinated actions by different agencies without proper sharing of information and in good time.
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